U.S. Markets open in 6 hrs 49 mins

Meadowbrook Insurance: A Strong Sell

Meenakshi Sharma

On Nov 13, Zacks Investment Research downgraded Meadowbrook Insurance Group Inc.  (MIG) to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #3 (Hold).

Why the Downgrade?

Earnings estimates forMeadowbrook have remained sluggish owing to dismal third-quarter 2013 results, higher debt and reduced investment returns. The company has delivered negative earnings surprise in 3 of the last 4 quarters, with an average beat of 105.8%.

Additionally, this multi-line property-casualty and specialty insurer underperformed the year-to-date S&P 500 index, which posted growth of 23.9% against a return of 17.1% clocked by Meadowbrook.

On Nov 5, Meadowbrook reported third-quarter operating earnings per share of 10 cents. Although these rebounded from the year-ago quarter loss of 55 cents, results lagged the Zacks Consensus Estimate of 13 cents.

Total expenses declined 32.3% over the prior-year quarter due to lower underwriting and loss adjustment expenses. However, top line plunged 16.9% owing to lower net investment income along with weak premiums and net realized gains. Combined ratio improved on the back of lower expenses. Nevertheless, book value per share and operating cash flow deteriorated substantially.

Although Meadowbrook sits on a modest cash position, lack of any current growth catalyst amid increased debt and declining cash flows restrict desired growth. Moreover, business is facing operating challenges after the company discontinued some of its operations that reduced premiums, despite the recent hike in rates.

Fluctuations in currencies and equity markets and low interest rates have taken a toll on investment returns. These factors are also making investors jittery.

Following the earnings release, the Zacks Consensus Estimate for 2013 remained intact at 15 cents per share in the last 7 days. However, the estimate for 2014 is pegged at 60 cents a share, down 4.8% in the last 7 days. This reflects a cautious estimate, at the mid-point of the company’s earnings guidance of 50−70 cents per share for 2014. Meanwhile, no upward revision in estimates was witnessed for both the years.

Other Stocks to Consider

While we prefer to avoid Meadowbrook at present, other stocks that are outperforming in the insurance sector include Hallmark Financial Services Inc. (HALL), Hilltop Holdings Inc. (HTH) and CNA Financial Corp. (CNA). All these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on MIG
Read the Full Research Report on HALL

Zacks Investment Research